Insider Trading
Categories: Investing, Stocks, Company Management, Ethics/Morals, Board of Directors
Like getting rich, but hate doing "real" work? Got a bunch of money to bet on stocks, but have no clue what tech IPO to buy into?
Then the highly illegal, but poorly regulated crime of insider trading is for you. Just find yourself a pal who is a feeling-underpaid secretary or janitor at Goldman Sachs, and start leaving cash in envelopes under park benches (do not use Venmo or give away baseball tickets). Then wait for a stock ticker symbol on a Post-It note to arrive on a subway car seat way out in Yonkers.
You’ll want to buy that stock, because another, larger company is about to do so by using an excessive amount of debt (or other peoples' money). But don’t get too greedy. If you’ve only been making $900 a roll with every "stock sell," the SEC will get suspicious about five-figure gains in two weeks.
Insider trading is the trading on information that isn’t known to the public. So...let’s say that your buddy at Goldman knows that an airline company is going to get purchased next week, and he tells you because he worked on the merger. Neither he nor you can now own the stock. You shouldn’t/can't buy it, comment on it, or even look cross-eyed, saying nothing if someone asks you about it.
The SEC is in charge of investigating and charging white-collar criminals who bilk investors out of billions from insider trading.
The Securities and Exchange Act of 1934 (the '34 Act) made it illegal to use inside information to trade stocks. Since people could make a lot of money with insider information and thought they wouldn't get caught (who's going to know I overhead the CEO of Big Company talking about a merger in a Denny's washroom?), some folks pretty much ignored the law.
The 1988 law was basically Congress saying, "We're really serious about this." The 1988 legislation added some hefty penalties if you get caught.
People still trade on insider information though and seemingly only rarely get caught. Cynically, everyone knows that if you make a huge bet on a roulette wheel, and it happens to stop at the exact moment it hits your number, well, you're probably cheating. And for a long time, everyone knew that people who had important information, or "insider info," would probably be the first people to put their fingers into the proverbial roulette wheel to their own profit.
Related or Semi-related Video
Finance: What is Inside Information?5 Views
Finance a la shmoop what is inside information?
all right well inside is here the boardroom where secrets are kept outside [Board room door opens]
is here Wall Street where secrets are well sometimes
illegally exploited inside legal fiduciary duty to keep your mouth shut
about mergers, acquisitions, how business is doing whether or not the CEO did in
fact film himself planking naked on the roof of the Mercedes dealership all of [Man planking on roof of Mercedes building]
that is kept inside that's inside information outside yeah Regulation FD
full disclosure everything that is disclosed to everyone at the same time
that's outside information or acceptable information for all.. Inside information
is knowledge you have that would let you invest with an unfair advantage over
everyone else you have to act as an investor, advisor or anyone in the wall
street dance on a fair and level dance floor otherwise if they catch you yes
you go to jail so the big fat red line that delimits what inside is versus [Pen draws a red line]
outside is well simply the question does everyone know this or could everyone
have known this had they simply looked at or did the math.....
you happen to be at Verizon having lunch with a buddy who did something bad in a [Man having lunch with friend at Verizon]
former life and now has to work in customer service there you leave to take
a whiz while you're standing there streaming broadband you see the CEO of
Verizon, you recognize him from the distinctive comb-over stand and well
you stream next to him the two of you streaming there in stereo he has the one [Man and CEO peeing at urinals]
hand on the steering wheel and the other is holding his iPhone it's volume is
turned up loudly nobody else is in the men's room there and you can hear the
voice on the other end say okay it's confirmed Goldman is committed now to
helping you raise twenty billion dollars to buy Netflix and the Verizon CEO says
I'm very excited let's get this process started tomorrow okay now you have [CEO discussing money on iPhone]
inside information you heard something you shouldn't have heard you can't short
Verizon and you can't buy Netflix now at least without landing yourself in the
slammer neither can any of the people you work with or friends or family they
are now liable because they are what is called covered parties which means that
they are covered by the same rules that you're covered by which means that
they're obligated to follow the same set of strictures and are essentially
treated as if they more or less are you well what do you do well you immediately
finish the streaming zip up wash using soap and then phone your compliance [Man washes hands and exits the restroom]
lawyer and tell her to stop trading in either stock until you can come in and
explain all the facts and details to her and her buddies there inside information
is not illegal to have it's only illegal to use as a basis to trade and make
money so fingers crossed you're good at keeping secrets [Man crosses his fingers]
at least well better than this guy
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